https://macropaperwarehouse.com/authors/george-marios-angeletos/George-Marios AngeletosHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/can-deficits-finance-themselves/https://macropaperwarehouse.com/papers/can-deficits-finance-themselves/<p>The paper asks whether a government can run a deficit today — issuing &ldquo;stimulus checks&rdquo; — and allow debt to return to its initial level without any future tax hike or spending cut. In environments combining <strong>(i) nominal rigidity</strong> and <strong>(ii) a violation of Ricardian equivalence</strong> (due to finite lives or liquidity constraints), this is possible through two complementary self-financing channels: (a) a Keynesian boom in real activity that expands the tax base and automatically raises revenue at existing tax rates; and (b) a surge in inflation that erodes the real value of outstanding nominal government debt. The paper&rsquo;s headline result is that <strong>self-financing increases monotonically as fiscal adjustment is delayed</strong>, converging to <strong>full self-financing</strong> in the limit: if monetary policy does not lean too heavily against the fiscal stimulus, the initial deficit eventually returns debt to trend with no required future adjustment. Calibrated to empirical evidence on intertemporal MPCs, the speed of fiscal adjustment, the Phillips curve slope, and the monetary reaction, the model finds self-financing up to <strong>ν ≈ 0.95</strong> — with the tax base channel dominant and inflation contributing negligibly.</p>